How LEGO Almost Collapsed Then Made It Back

Joe Shlabotnik/FlickrWhen was the last time you played with LEGOs? For me, it must have been at least 35 years, maybe longer. But then last month I built the LEGO version of Frank Lloyd Wright's Fallingwater House, part of the LEGO Architecture Series. I've been revisiting a few different things recently— in this case, the motivation was reading the excellent book Brick by Brick by David Robertson and Bill Breen. (I recommend it.)

And it's not just me. I was visiting my friend Jim last week, and we were surprised to discover that we're both playing around with arduino programmable gear. In Jim's case, he's been working with a LEGO Mindstorm kit — including figuring out how to program it to solve a Rubik's Cube. It seems like a lot of us old guys are playing with LEGO these days.

LEGO was founded by Ole Kirk Christiansen, whose founding value was "only the best." They became one of the dominant toy companies in the world through the second half of the 20th century, then nearly went bankrupt in 2003. Since then, LEGO has reoriented itself, and become wildly successful again. Robertson and Breen focus on the events leading up to the near-death experience, and then those that led to the reinvention of LEGO. In particular, they look at the role that innovation played in both the crisis and the recovery.

One of the points that Robertson and Breen make is that LEGO was trying hard to innovate all the through both the crash and the recovery. They implemented many of the common innovation tools in the time leading up to the crash: they had a huge focus on disruptive innovation and searching for blue oceans, the formed diverse creative teams, and they tried several different versions of open innovation.

Nearly all of the products that resulted from these efforts failed — and that is what led to the collapse.

Then, as LEGO successfully launched the Architecture Series, and LEGO Games, and a whole series of wildly successful new products, they used the same set of tools to create these breakthroughs.

Clearly, the issue wasn't which innovation tools they were using.

Here is Why Innovation Tools Don't Matter

In the late 90s, LEGO's market share had begun to decline. Kids were playing more with video games, and other toys, and LEGO wasn't cool anymore. They decided that they had to disrupt themselves, before someone else did. So they want all out in trying to do this. This is when they started to consciously implement the innovation principles just mentioned.

The outcome was a string of very expensive failed product launches. Robertson and Breen frame this as a case of over-innovation, I've argued before that when something looks like over-innovation, it is really poor innovation. If we think of innovation as executing new ideas to create value, the problem the LEGO faced was that they were executing plenty of new ideas, but they weren't creating much value with them.

This is a common innovation problem — and it reflects several underlying factors:

Poor overall management. As LEGO reached its crisis point in 2003, everything was going wrong. Their financial control was very poor, and they had lost touch with what customers wanted. Furthermore, even when people that loved LEGO reached out to try to contribute ideas, the firm was fairly arrogant in ignoring this input, believing instead that they knew best.

Lack of strategic focus. In all of the pre-2003 innovation efforts, LEGO was obsessed with novelty — with doing new stuff. But they were so far removed from understanding what their customers wanted (or even who they were), that these new ideas failed to create value. They thought that the power was in the brand — so they launched things like LEGO TV series. But really, the power was in the bricks — it was refocusing on this that started to turn the firm around.

Disconnection from customers. Many of the misfires prior to 2003 were the result of not understanding what kids wanted — most of the new products were based on assumptions about this, not on feedback from the customer base.

When you are messing up the fundamentals of management, it does not matter what innovation programs you throw on top of a flawed strategy. Any innovation will be based on a faulty view of the market. This is why Greg Satell is right when he says that strategy and innovation are two distinct things.

Peter Drucker once said: "There is nothing so useless as doing efficiently that which should not be done at all."

The case of LEGO shows that it is also true that there is nothing so useless as doing innovatively that which should not be done at all. You have to get your management fundamentals right first. Once you do, then you can start applying innovation tools.

Getting Innovation Right at LEGO

The first step in righting the ship at LEGO was focusing on the right goals. They went back to a focus on quality, and making sure that everything was built on the bricks, not just the name. Here is the graphic that Robertson used in his HBR article on LEGO:

The next step was building an innovation portfolio. LEGO had gotten so obsessed with disruption that they forget to build on their successful core products. Here is how Robertson and Breen put it:

Having defined the different areas of innovation that LEGO would pursue, the working group also recognized that "innovation" doesn't necessarily mean "radical" — that, in fact, different opportunities require varying degrees of innovativeness. The new model spotlighted three different approaches to marshaling the kinds of change that would help LEGO advance its goals. The first, simplest type of innovation was to adjust existing toys — that is, to freshen up an evergreen line so that it attracts news waves of kids without adding significantly more development and manufacturing costs. After the first launch of Bionicle, each subsequent release was an exercise in making incremental improvements. Adding new features, new story lines, and (later) vehicles for the Bionicle characters were small but very profitable innovations. Senior vice president Per Hjuler captured the attitude of many LEGO managers when he asserted, "I am continually humbled by the power of the little idea." The next, more challenging innovation was to reconfigure — to change existing building systems or platforms to provide a new customer experience. LEGO had a blockbuster with its Star Wars toys and a minor but promising success with Slizer. Combining the two concepts to produce a set of buildable action figures with a rich, episodic story line meant that LEGO had to blaze a new path to profits, but it was starting from a familiar place. The result was a hit series of toys that generated significant sales for almost a decade. Reconfiguring innovations change the terms of competition in an existing market. The most difficult and unpredictable innovation is the kind that redefines a category. Case in point: the 1998 Mindstorms RCX kits, the company's first foray into robotics. (The second version of Mindstorms, released in 2006, was a reconfigure innovation for LEGO.) Another example was LEGO Universe, an online game where kids from all across the planet could connect and play. In the next two chapters, we cover each of these radical attempts at redefining LEGO play.

The next big step was opening up to the LEGO community. Why is my friend Jim able to make his Mindstorm solve Rubik's Cubes? Because of the community. Shortly after Mindstorm was released, the enthusiastic community of adults that love LEGO hacked the software. After a great deal of thought, instead of shutting down the hackers, LEGO embraced them. It was this community that led to the overwhelming success of the product.

This then led to further collaboration with the community:

Smith-Meyer returned to Knudstorp and Pallesen and won their backing to revise his brief. Instead of taking a year to find two potentially big growth opportunities and then invest significant resources to develop them, the front-end team would align with entrepreneurs who were already working on nascent but promising projects. Within a matter of months or even weeks, the team would use the LEGO Group's know-how to help these entrepreneurs test the market, make necessary revisions, and test again. The idea was to avoid making bet-the-farm mistakes by launching a series of low-cost, low-risk experiments, which would increase the odds that one might grow into a runaway success.

In the end, it was the renewal of purpose and the engagement of community that drove the revival at LEGO. These are two key components of innovation success, and they are much more important than whatever tools or techniques you choose to use. These are fundamental components of management, and you have to have these right before you can innovate.

Personally, I'm glad that LEGO figured out what to do, and that I've rediscovered them. Now I just have to figure out what to build next.